1099-NEC for SREC income

[insguy]

My client purchased and installed residential solar panels for his home in 2021 and received the tax credit. In 2022 he is now receiving a 1099-NEC for over $15k for supposed unused energy generated from his system that was sent back into the grid. From some articles I read i sounds like this is legitimate taxable income but because it was reported on 1099-NEC I am being forced to report it as Sch C income so he is getting dinged for the self employment taxes also. Can this be correct? Shouldn't it be 'other income' instead? 1099-NEC is forcing me to enter on Sch C or Sch F.

[TaxGuyBill]

First, you need to figure out what the income is for.  In your title, you said SREC, but then you mentioned selling energy back to the grid.  Those are two completely different things.

$15,000 of electric production for selling back to the grid?  I would think that would require much more than just panels installed on a home roof, unless there were MANY installed on the ground in a large field.

[IRonMaN]

Bill - here is the client's yard:

[TaxGuyBill]

That would be awesome!

[qbteachmt]

It needs to be on a NEC because of all the time spent cleaning off the panels in that field. Services rendered.

Ha ha ha.

Quite often the concept of "you can write this off, you can depreciate this, you will make more money than it cost you to put the system in place" = Business rules. What did the sale include, what is the arrangement with the power company? It seems the taxpayer is a positive net generator entity.

[BobKamman]

This PLR might help:

https://www.irs.gov/pub/irs-wd/1035003.pdf

Maybe this is a one-time payment, for all the REC's that the system will generate over the years?  (And I don't think they have to involve anything going into the grid.)  Other references indicate that the 1099-MISC was used in previous years.  Did he actually receive $15K?  When?  Does he expect to receive more in future years?  

I would first ask the utility why they decided to use the -NEC and not the -MISC or even the -S.  

[insguy]

Taxpayer doesn't really understand what he received or why. He purchased a modest $37K solar panel system that was installed on the roof of his home. Below is the response he received from the Solar Installer that sent him the 1099-NEC for $15,373. 

First, I’ll say that you should absolutely consult your tax, legal, or other advisors for any tax, legal, or other advice, as we cannot provide such advice to you. The reason we sent the 1099s is because we believe, based on our understanding of applicable law and IRS guidance, that SREC income is taxable, and so we are acting in a manner that we believe to be in accordance with our legally required obligations. We note that there is a non-precedential IRS Private Letter Ruling which states that a taxpayer “who purchases ‘a residential solar electric system . . . must include gain from the sale of the RECs to Public Utility in Taxpayer’s gross income under [Code Section 61(a)]” (see also this commentary). We also note that, according to ComEd’s website, ComEd appears to take the position that SRECs are subject to tax (Solar Incentives & Rebates | ComEd - An Exelon Company – “Please note this is an incentive which is subject to tax.”).

This totally puzzles me. Appreciate any help!

[TaxGuyBill]

It should be on a 1099-MISC, not a 1099-NEC.

So yes, it is reported a "other income" (or possibly short-term 8949/Schedule D, but I would go with other income).

$15,000+ for SRECs is impressive, and must be an upfront purchase of many years.

[PATAX]

If it should be on a 1099 miscellaneous then good luck trying to get them to correct this. My experience is that entities do not like to correct their 1099 errors and this has been going on for many years. Maybe the time has come for the IRS to start penalizing entities for issuing incorrect 1099 forms. Don't they penalize tax preparers for their errors? 

[BobKamman]

Solar installers are not known for winning any BBB awards.  You quote this one, "The reason we sent the 1099s . . ."  So whose name is on the 1099?  The electric company, or the contractor? And did the electric company send a 1099-NEC to the contractor, which would have been the right form, and the contractor's bookkeeper said, "You're gonna have to pay tax on this unless you pass it on to a dumb customer"?  

Was there ever a $15K payment?  Did it ever go to the client?  Or did the client get a break on the price because he assigned the credit to the installer?  

[insguy]

Thank you all for comments and advice. Believe it or not they issued a new 1099-MISC this morning. It's going on return as 'other income'.